FCA redress guidance has been updated as at March 2021 – this article explains the background as at the date of the Government’s announcement of the change and has now been updated with a follow up article which can be read here.
The FCA has announced its intention to amend guidance for firms on how to calculate redress for unsuitable DB transfers in mid-March 2021 to reflect Government changes to the way that the Retail Prices Index (RPI) inflation measure is calculated from 2030.
FCA redress guidance FG17/9, originally published in October 2017, refers to both the RPI and the Consumer Prices Index (CPI). The RPI change means that from February 2030 the -1% adjustment to the RPI assumption used in the guidance to calculate the CPI assumption will not reflect the assumed difference between the RPI and the CPI. It will be too large, and some consumers may not receive the correct amount of redress.
This will affect consumers who transfer out of DB pensions that are uprated annually in line with the CPI.
The CPI adjustment will be made by mid-March 2021 but it will be backdated to 25 November 2020 and will apply to all calculations carried out from that date, as set out below.
What firms should do until the guidance is updated
The actions set out below apply to calculations of pension transfer redress offers done in accordance with guidance on or after 25 November 2020. They apply regardless of whether a redress offer has already been settled, including on a ‘full and final settlement’ basis. If, after considering this statement, a firm believes that a calculation might have ‘unduly disadvantaged’ a customer, they should revisit the calculation:
- Firms should consider whether the current approach to calculating CPI inflation in the guidance causes disadvantage to consumers, given changes to market inflation expectations reflected in the Bank of England’s UK instantaneous implied inflation forward curve (gilts) which can be found here.
- Where possible, firms must ensure that the redress calculation reflects the features of the customer’s original defined benefit pension scheme (paragraph 3 of the guidance) so as to place the consumer as far as is possible in the position that would have applied if the unsuitable or non-compliant advice had not been given.
- Where a customer was eligible for CPI-uprated benefits if they had not transferred, and firms are aware that applying the guidance results in an inflation assumption that does not reflect CPI, they must account for this in their redress calculation. If firms are unsure how to account for this, they should wait for the updated guidance before proceeding with the redress calculation, and must advise the customer accordingly.
- Firms that are concerned about running over the 8 week limit in rules for responding to complaints should send a written response explaining why and indicate when they will provide a response.
- Firms should not settle redress payments, including on a ‘full and final settlement’ basis, until the guidance has been updated.